Re-imagining my “ideal” tax system

With the ongoing partisan squabbling about tax accompanying the imminent federal election, I thought it might be worth setting out my own “wish list” for an ideal tax system.

As readers know, I am not an economist or accountant, and I have made no attempt to calculate whether the proposals discussed below would raise enough revenue to fund current and expected government expenditure needs and to eliminate the federal deficit over a reasonable period of time.

I would be interested in reader observations or calculations about that, as well as your thoughts on the workability of these ideas. I’m not interested in being told about their political non-feasibility. I am well aware that in Australia’s contemporary political culture just about any tax proposal no matter how sensible and workable will be automatically demonised in extravagant terms by the opposing political party and by interest groups who see themselves as losers, to the point where any meaningful change becomes politically impossible.

That’s why I refer to this as my “ideal” tax plan. It could only ever be implemented by a government with a majority in both Houses very early in its term of government, and even then it’s highly unlikely that any government would have the guts, except perhaps if our economy ends up in similar shape to that of Greece. Nevertheless I think there is a point in re-imagining what a good tax system would actually look like.

The concept

The principal measure I have in mind is a Negative Income Tax (NIT) or conditional Minimum Income Guarantee (MIG) not a Universal Basic Income, together with associated “Big Brother” IT payments automation. In an overarching sense these proposals are predicated on my perception that Australia has an increasing economic underclass whose position is characterised by extreme income insecurity:

long-term unemployed people (who will often also need a range of other social and medical supports given the prevalence of people with various disabilities among their ranks);

I don’t think it’s feasible to return to a highly regulated, protectionist welfare state that many on the Left envisaged (and had partly enacted) prior to the triumph of neoliberalism in public policy in the late 1970s and 1980s. Nevertheless, unless constructively addressed the phenomenon of widespread economic insecurity will progressively worsen over time as middle class workers are gradually thrust into insecure work conditions with the increasing sophistication and availability of Artificial Intelligence systems, advanced IT and robotics making it more and more feasible to replace knowledge workers with machines. A much more substantial universal guaranteed minimum income system is in my view essential to Australia’s continuing progress as a prosperous, civilised advanced nation. I suspect that this sort of underpinning income security for all will actually enhance national income rather than undermine it through excessive taxation. We cannot continue to push more and more people into financially insecure, marginalised work situations under the pretext of a “flexible” workforce, while blaming them for their own predicament in order to transfer an ever greater proportion of national income from labour to the owners of capital.

I don’t have in mind that either income management or a voluntary work requirement would be imposed on either age or invalid pensioners or people unemployed for a relatively short time. However for long-term unemployed and people who consistently need income supplementation by NIT it seems perfectly reasonable to me that there should be some expectation of tangible contribution to the community as a quid pro quo for long-term community support of a person’s income. If it’s broadly based and becomes a permanent part of the landscape it ceases to be seen as punitive or discriminatory and becomes instead part of the accepted fabric of citizenship. It involves genuine mutuality of obligations.

I’m not just talking about Work for the Dole with community or charity organisations but also things like child care and aged care work. There is a huge unmet need for both, although obviously a lot of unemployed or under-employed people won’t be suitable. Moreover, qualifying contributions would even be set wider than that, including not only land/environment care but even structured, accountable artistic and craft endeavour. What I have in mind over time is redefining the concept of work, especially if/when AI etc starts reducing waged work opportunities for the middle/professional class as well. How will we distribute money/the means to live in a future society that is enormously wealthy but where most of the wealth (at least as currently defined by economists) is produced by machines and machines controlling those machines, with only a tiny number of humans involved in any meaningful sense?

Personal income tax

The first $430 per week (approximately $22,000 per year) each person earns would be totally tax free. The threshold would be indexed annually to CPI. Thereafter all individuals would pay a flat tax rate of 25% (or perhaps 30, 35 or even 40% if budget-balancing requires that), with automatic normal work-related deductions allowed but detailed substantiation required if more than that is claimed.

Any investment could be negatively geared, and losses carried forward without limit but only claimed as deductions against future income or capital gains tax on that type of investment (not against wage and salary income). Existing negatively geared investments would be grandfathered as per the current ALP proposal.

Negative income tax/minimum income

Any adult earning less than $430 per week in any given week would have their income topped up to that amount by a federal government Negative Income Tax payment. This includes the unemployed, single parents and people on other social security benefits including aged and disability pensions. This figure for a single person is approximately equal to the Henderson poverty line. There would need to be variations for couples and families (as per Henderson figures). No NIT would be paid in any week when a person’s income (from any source including rents and dividends as well as wages) exceeded $430. The minimum income/NIT would be indexed annually against average weekly earnings (using Henderson figures). The weekly NIT amount equates roughly to what a person would earn from working 27 hours per week at the current national minimum wage (around $16 per hour).

Any person receiving more than half of their income in any week from the NIT (rather than from waged income etc) would be subject to compulsory income management in relation to the NIT component of their weekly income (i.e. it would be paid into their bank account and could only be spent on food, rent, clothing and public transport fares), unless they undertook no less than 14 hours per week unpaid work with a community or charitable organisation, Green Army etc. Alternatively they could undertake that number of hours of unpaid aged or child care work, as long as they had received suitable training and accreditation for such work (including a suitable psych assessment) and hold a current Ochre Card or similar clearance.

To facilitate such a system, Australia’s payments systems would need to be highly automated, with secure ID verification via mobile phone/device equipped with iris scanning and encrypted transmission of payment authorisation to each person’s bank account via EFTPOS or similar payment terminal for all transactions. Australia would become an almost cashless society. Government IT systems would have permanent access to everyone’s bank account to calculate and credit the appropriate NIT payment dynamically each week, and to deduct PAYG income tax weekly from the accounts of those earning more than $430 in any given week. Wages, rents, dividends etc would be required to be paid into a bank account monitored by government IT systems for these purposes (with strong privacy protections for all other purposes). It should be possible to design a system where PAYG taxation payments occur automatically without any administration by employers (a major saving on business expenses) and where many employees don’t need to lodge an annual tax return. Linking business bank accounts into the system might also enable quarterly BAS statements to be dispensed with (although that would be trickier). Big Brother as the price of efficiency, simplicity and income security for all.

Company tax

Company tax would be levied at a flat rate of 25% of profit, with no dividend imputation. Trusts would not be recognised for taxation purposes (their sole purpose is artificial tax minimisation). There would be unlimited carry-forward of losses and unlimited ability to retain and reinvest profits (thereby avoiding or deferring double taxation in the hands of shareholders).

There would need to be strong provisions to prevent or minimise use of offshore tax havens and artificial schemes to shift profits offshore by both foreign and local corporations. It is beyond the scope of this article (and my expertise) to propose a detailed scheme for this. The proposed Google Tax is probably a good place to start but I suspect more is needed.

Capital gains tax

Capital gains tax would be levied at 25% of the net capital gain on market sale price (by valuation if non-arm’s length sale). Actual expenditure on capital improvements (not maintenance) during the ownership period would be deducted from the sale price to arrive at the net capital gain figure, and any negative gearing losses during that period could also be deducted.

The family home would remain CGT exempt (up to a fairly high value cap – say $5 million) but there would be no reduced rate for investment properties.

GST

GST would be levied at 15% on all goods and services including food, educational, medical and other spending i.e. no goods or services would be GST-exempt. The states and territories would receive (on a needs basis as at present) a share of the increased GST pool to a sufficient extent to fund their impending shortfalls on health and education spending, but some would also be retained by the Commonwealth to assist with funding the tax cuts outlined above and to address the structural deficit over time.

Land tax

The Commonwealth would levy a land tax on all privately owned land throughout Australia, both residential and commercial. The rate would be 1% of Unimproved Capital Value on residential land and 1.5% of UCV for commercial land, with no minimum threshold in either case. That would mean a typical suburban housing block worth $300,000 would have an annual land tax liability of $3000 per year, payable by monthly instalments of $250. This would be entirely separate from any state or territory land tax.

Death duties

All personal assets (including real property and shares) would be liable to death duties of 25% on the then net market value of each asset (with deductions as per CGT). Payment of duty on the family home (where it is retained in the family) could be deferred until the youngest child in the family turns 18, or for up to 10 years where the surviving spouse is over retirement age, up to a value of $2 million (indexed to inflation). Furniture and household effects would be death duty exempt up to a maximum total of $100,000 value (to deter tax avoidance by investing in antiques or art works). Similarly with motor vehicles.

Resource Rent Tax

The Commonwealth would levy a resource rent tax on all mined onshore minerals similar to the current one applying to offshore oil and gas. It would be levied at a rate 50% higher than the average of current state/territory mineral royalties and 75% of proceeds would be remitted as untied grants to the states in the proportions levied from minerals mined in that state/territory, conditional on their repealing their own mineral royalties regimes.

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About Ken Parish

Ken Parish is a legal academic at Charles Darwin University, with research areas in public law (constitutional and administrative law) and teaching & learning theory and practice. He has been a legal academic for almost 12 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in he early 1990s.

12 Responses to Re-imagining my “ideal” tax system

Nice! Debates on the ideal tax structure are very useful, even if only in the long-term.

Two quick comments: you seem to be talking almost exclusively about taxes by the Federal government. Local government taxes, like stamp duty and council rates, are quite a large part of the total tax receipts. You want to add your ideal tax mix for them too to your list above!?

Second, I miss a plan here to make companies pay their fair share of taxes. That requires some notion of the ideal tax structure of other countries, or at least a plan for how to deal with tax havens. Want to add that dimension too so that you have a comprehensive ideal tax system?

I don’t have enough knowledge to suggest additional tax avoidance measures against corporations using tax havens etc. There are lots of international tax treaties, WTO etc which impose constraints on what can be done. My knowledge of them is minimal. If it could be done, the easiest way would be to tax local trading receipts of corporations on a presumptive deemed reasonable rate of profit on Australian turnover. After all, that’s essentially how they tax pensioners’ savings, so why not corporations? The deeming provision could place the onus on a corporation to prove that claimed offsetting borrowings (usually loaned to the Australian trading entity at high rates of interest by a foreign affiliate incorporated in a tax haven) were for genuine commercial purposes and at a genuine commercial rate of interest. Similarly with one of the other common dodgy methods of shifting profit to tax havens: a related entity incorporated in a tax haven owns all the group’s IP and charges a very large fee to the Australian trading entity for using it. Again there could be a presumptive deemed reasonable IP licence fee that would be allowed as a deduction.

As for state and local taxes, I think I’ll pass on a proposing a detailed plan. The much higher GST proposed in the primary post would permanently resolve federal/state fiscal imbalance and allow the states to discharge their obligations in the big ticket areas of health and education. Otherwise, in general terms stamp duty is a bad tax and payroll tax should be reduced if possible. Both should be replaced with fairer and more efficient taxes like land tax (some states already have one) and perhaps state death duties.

The latter could fairly levy up to another 25% of the value of deceased estates, making 50% in total between Commonwealth and states. I don’t see any reason of equity, social justice or economic efficiency why we should have the right to pass on any more than 50% of our assets to our kids. But it should be much lighter on smaller estates or have a threshold that exempts smaller estates. There would also be issues with assets consisting of the modest family private business which continues to employ future generations. There would need to careful thought to finding ways that such businesses did not need to be broken up or sold off on death of the founder.

Since the video is up there, I’ll just complain that the NIT is going to have to be subject to all the nitty-gritties that other payments have unless you want it massively over price. For example, the Aus workforce has a participation rate of about 65%. This leaves about 6 million people of working age who do not work. Presumably some of those people don’t need to work due to other asset streams, but assuming 5 million do, that’s 20 billion dollars (assistance to the unemployed and sick is 11 billion, including other services). Then you have students over 18 who will more or less all get it. Assuming 500K of these, you can add another 2 billion (minus current payments given to them, which are less than $400 per week). Finally, pensions are 60 billion of which the single pensioner rate is very similar to $400, but the partner rate is about $300 each. I don’t know what the breakdown is there, but assuming many pensioners live together you are up for 10s of billions of dollars.

So unless you can think of all the strategies the government currently uses to get people off welfare when they have no money (being married, assets…), most of which are not going to be easy to automate, you are going to be billions over.

Apart from just the money side, it is also regressive without annoying rules (you will be paying rich people), and unfair because if you are, for example, a rich contractor and have a lumpy income, you will get the same amount of benefits than if you are, say, a full-time minimum wage worker. Similarly, for rich retired people, the simple solution to get it all is to hold assets which payout rarely (e.g., funds with a 6 month dividend), in which case you will still get almost the full NIT.

My suggestion is that the NIT would be essentially the same as the various Henderson poverty line figures. In other words there WOULD be a lower couples rate as with the age pension. In fact age pension rates are quite similar to Henderson figures, so in a sense what I am suggesting is that age pension payments should be available to all adults, adjusted according to how much they earn from all other sources.

Clearly this will be expensive. Looking at how this whole proposal/plan would work out in a global sense, the higher GST should raise about an extra $60 billion per year (double current GST receipts), which would eliminate the federal deficit and fund health and education spending the states will need from 2020, and leave some remaining. The company tax cut won’t cost much with abolishing dividend imputation and cracking down further on corporate use of tax havens etc. Thus the balance of the GST increase and the proposed new taxes (federal land tax, death duties and mining resource rent tax) would need to be able to fund the NIT scheme.

Absolutely, we need to consider the ideal tax system so we can try inch our way towards it.

I think the land tax idea is much more politically sellable if you have a negative income tax. So, even if you don’t have a job, you will be getting enough in payments to pay the land tax.

Would you allow deductions to be made against the land tax? Or would that still function as normal? Would there be a case for considering investment property as commercial and subject to the higher 1.5% rate?

Lastly, maybe I missed it but I didn’t see superannuation mentioned. Given your proposed 25% tax rate on income tax, perhaps the employer’s super contribution is taxed at the marginal rate (0% below $22k and 25% above rather than the current 15%? tax on contributions).

Would you tax earnings on super during the accumulation phase? Currently, 15-30% I think.

I was implicitly assuming that the Coalition tightening of high end super concessions should certainly be enacted. In addition, as you suggest, it would be appropriate for there to be 0% tax on super contributions up to an annual income of $22K. However I think we should stick with 15% tax on contributions above that. It remains good policy IMO to have tangible incentives for people to make provision for their own superannuation. I think earnings in the accumulation phase should be taxed at 15% for most but the high income rate lowered to 25% (consistent with the general tax rate proposed).

A 25% flat tax would be grossly inadequate to fund a Minimum Income Guarantee (MIG) at that level. It is an MIG, not an NIT, you are proposing; the corresponding NIT would guarantee the $430 but would have a tax free threshold of zero with a flat rate of 25 cents and cost a bit more (because you won’t be completely confiscating the earnings of those who pick up a few day work in a fortnight).

Some years ago Peter Dawkins of the Melbourne Institute modelled a true NIT and found that for a base rate set equal to the then pension you’d need a tax rate of 45%. While I thought the modelling technique chosen biased this result upward a bit (its a long argument), its definitely not as low as 25%.

What’s the assessment period? If a fortnight, like welfare payments, then you would rapidly find people will all be paid monthly and get their MIG payment on the off fortnight. Oh, you are going to use some form of waiting period or income averaging or both to avoid this? Then how do you avoid massive debts and/or people in need being left without support for long periods? Plus of course you are still going to have an expensive, intrusive and unpleasant Centrelink/ATO bureaucracy to track people’s fluctuating incomes.

Of course this last goes quadruple if you are going to enforce income management on the great bulk of people who use the NIT for short periods between jobs, etc. Oh, and are you going to enforce that 14hrs on old people in nursing homes, on people with severe mental disability, etc? No – then what’s your assessment criteria and how will you periodically review people? And of course what do you do when community organisations find themselves flooded with reluctant and unqualified “volunteers” and don’t want them anymore? Move to Work for The Dole type schemes? Gee, you’re going to be spending a lot more money on them for little result – they have a dismal record.

Plus of course all the international evidence on this type of income management show they only work if they are targeted at subgroups whose members can reasonably be expected NOT to be in a position to use their money rationally – not the many millions of respectable voters we’re talking about in your scheme, of whom we can basically follow the market economists’ assumption that they know what they need better than some bureaucrat does. The other thing the evidence shows is that such schemes change behaviour best when they avoid a punishment and shaming approach and are accompanied by fairly intensive OTHER interventions – does making it conditional on “contributing to the community” sound like that to you?

Personally I’ve always been in favour of Basic Income approaches (a close relative of NITs – the difference is essentially administrative), but they are quite incompatible with lots of conditionality (ie telling people how to live their lives) and most people like conditionality (for others – not themselves, of course).

As I keep saying, if you want something to achieve the messy goals of the current tax/transfer system then it is always going to end up looking like the current messy system. So debate should be in the first instance be about ENDS, not MEANS – and innately you will get no consensus there because we all talk our own book. No-one lives behind a Rawlsian veil of ignorance.

Most of the points you make are matters of detailed design for which provision can fairly readily be made. It isn’t sensible to go into that level of extreme detail in a blog post or ever the comments to it IMO.

I don’t have in mind that either income management or a voluntary work requirement would be imposed on either age or invalid pensioners or people unemployed for a relatively short time. However for long-term unemployed and people who consistently need income supplementation by NIT (I’ll keep calling it that for convenience) it seems perfectly reasonable to me that there should be some expectation of tangible contribution to the community as a quid pro quo for long-term community support of a person’s income. If it’s broadly based and becomes a permanent part of the landscape it ceases to be seen as punitive or discriminatory and becomes instead part of the accepted fabric of citizenship. It involves genuine mutuality of obligations.

Note that I’m not just talking about Work for the Dole with community/charity organisations but also things like child care and aged care work. There is a huge unmet need for both, although obviously a lot of unemployed/under-employed people won’t be suitable. Qualifying contributions could even be set wider than that, including not only land/environment care but even maybe structured, accountable artistic endeavour. What I have in mind over time is redefining the concept of work, especially if/when AI etc starts reducing waged work opportunities for the middle/professional class as well. How will we distribute money/the means to live in a future society that is enormously wealthy but where all the wealth is produced by machines and machines controlling those machines, with only a tiny number of humans involved in any meaningful sense?

As for the necessary flat tax rate to fund a NIT see my answer to Conrad. I see it being funded by the combination of the unspent residue of a higher GST + federal land tax, death duties, and mining tax. I don’t have either the time or expertise to calculate what sort of rates you would need to levy them at to fund a NIT, but I suspect the rates I’m suggesting wouldn’t be all that far from the mark. We’re talking about taxing every block of land in Australia at 1-1.5% of UCV per year and most deceased estates for 25% of their value. That would generate a very respectable pot of money to provide reasonable income security for all poor, disadvantaged and insecurely employed Australians.

“However for long-term unemployed and people who consistently need income supplementation by NIT (I’ll keep calling it that for convenience) it seems perfectly reasonable to me that there should be some expectation of tangible contribution to the community as a quid pro quo for long-term community support of a person’s income.”

You might want to think about what the trade-off between doing this and the cost of it is. In particular, if you look at who becomes long-term unemployed, a good proportion are essentially unemployable because they don’t speak English, have poor mental health, significant disabilities etc. .

In this respect, I find it hard to image a lot of people would really want to have some of these people working in things like child-care and so on, where there are hard to measure but certainly long term costs due to poor quality service in terms of early develop (and hence long-term achievement). You can also imagine the public hysteria when one of these people who is obliged to look after children/elderly creates some major incident. Do you want someone with an IQ of 70 that suffers high levels of anxiety/anger etc. working with your children? I don’t. Of course there are others that could do a very good job (e.g., those with poor English could teach their language or work with groups in their own community), but only having voluntary people solves this.

Also, I cannot imagine how any enforceable scheme would ever become non-punitive. Are there any in existence now? My preference is to offer decent quality training to those that want it, and simply accept that some people are never going to cope with modern Australia especially well and offer them other assistance.

Capital gains tax would be levied at 25% of the net capital gain on market sale price

Also, is that before or after inflation? If you propose to tax the increase in price from inflation that’s going to have nasty effects should inflation rise, and will regardless impact long-term investments (like, say, renewable energy or forestry). Plant trees now, harvest in 30 years, even at 2% you’re going to see a doubling in “price” due to inflation, and a halving of the value of any carried forward losses. I’m not sure that’s a good idea.